Lawsuit alleges Wallace intentionally mismanaged sewage plant

December 31, 2012

EDITOR’S NOTE: See a claim filed by six Oceano homeowners against South San Luis Obispo County Sanitation plant administrator John Wallace at the bottom of this story.

Six Oceano homeowners filed a lawsuit on Dec. 18 that claims sanitation plant administrator John Wallace’s financial motivations led him to intentionally mismanage the sanitation plant.

During a 2010 spill, sewage flowed into approximately 40 homes in Oceano. Unaware of allegations of mismanagement, none of the residents filed suits against the South San Luis Obispo County Sanitation plant before the six-month statute of limitations to make a claim against the public agency ran out.

However, that does not bar the homeowners from suing Wallace.

The Dec. 18 lawsuit filed by Santa Barbara based attorney Eric Woosley claims Wallace consciously elected to disregard public safety in an attempt to build his personal financial portfolio. Even though there is a two-year statute of limitations for filing suits against private contractors, Woosley said homeowners may still be able to seek reimbursement for their damages.

“Anyone wanting to sue should contact an attorney,” Woosley said. “The statute of limitations for a private contractor can be extended if facts had been concealed. It is conceivable people can sue now.”

In addition, Woosley asserts that there is no real financial separation between Wallace and his engineering firm the Wallace Group, and as such they should be treated as one entity by the court.

“There exists a commingling of funds, a failure of the shareholder to acquire insurance for the corporation despite a contractual duty to do so, and a complete sharing of the office and employees between the shareholder (Wallace) and the corporation (The Wallace Group), so as to make one the mere shell or conduit for the other,” the lawsuit says.

In late 2009, following reports of environmental abuses to local and state water authorities from sanitation district employees, the company that carried insurance for Wallace said it was canceling his coverage. Wallace’s failure to maintain errors and omissions insurance during the 2010 sewage spill could leave him financially responsible for the damage from the spill.

At a Central Coast Regional Water Quality Control Board hearing in September, another client of Woosley, former sanitation plant superintendent Jeff Appleton, testified that he had told both Wallace and the board prior to the 2010 spill that outdated wiring had led to two fires and needed to be repaired.

“Wallace would tell me, ‘We are continuing to look into it from an engineering standpoint,’ ” Appleton said at the hearing. “No work was actually done.”

In their complaint, water board prosecutors accused Wallace of not properly maintaining or operating the plant and failing to properly report incidents to regulators. Wallace is the owner and president of the Wallace Group, a private engineering consulting firm located in San Luis Obispo that receives from $50,000 to $80,000 a month for plant administration and engineering services. He, however, is not reimbursed for non-engineering related plant maintenance.

A month later, in October, the Central Coast Regional Water Quality Control Board voted to levy a $1.1 million fine against the district because the 2010 sewage spill was because of Wallace’s mismanagement.

The plaintiffs in the Dec. 16 claim are seeking an unspecified amount in punitive and compensatory damages along with court and attorney fees.John Wallace Complaint:

31 Comments

Doggin, regarding your post about the Seitz/Wallace claim that we can’t afford to pay the fine.

They are liars, and here is why.

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This post is long, but worth the time reading because, based on the information from the 9/7/2012 Water Board hearing, it shows the following:

1. John Wallace and the SSLOCSD Board used scare tactics to try to get ratepayers to protest the Water Board’s investigation into the Wallace/SSLOCSD Board’s malfeasance in administration of the SSLOCSD by scaring us into thinking our rates would have to be increased to pay the any fines levied by the Water Board. The truth is, we already have more than enough money, in short-term (less than 90 days turnover) SSLOCSD accounts.

2. For many, many years (perhaps decades) Wallace and the Board have held FAR MORE of ratepayers’ money in short-term (lower-interest-bearing) accounts than was needed, and FAR MORE than other WWT plants of our size hold in short-term accounts. $$$MILLIONS more.

So, it is a long read, but if you are interested in this subject, it might be worth your while.

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For someone who pursues trivia in transcripts and other documents (because sometimes it provides important issues to light), the 9/7/2012 Water Board hearing was a gold mine.

I don’t know why no one has brought up this information from the Water Board hearing before because, IMO, it is a BIGGIE, and it raises some other questions, too.

For instance….

1. Are the accounting records/documents/audits submitted by Wallace to the Water Board correct, or not? If they are correct, we have more than enough money to pay the Water Board’s fine, without coming close to having to raise customer rates. So why does Wallace keep saying we don’t have the money to pay the fine? If we don’t have the money to pay the fine, when Wallace’s documents claim we do, where did the money go?

2. WHY did Wallace and the SSLOCSD board elect to keep so much money in liquid assets, when it is not an accepted financial practice? Did they need to have $$$MILLIONS of SSLOCSD funds in short-term accounts to benefit Wallace/the Wallace Group? Has it been used as some kind of a slush fund? There has to be a reason for rat-holing so much money into short-term accounts. What is it? I think a forensic audit of the SSLOCSD’s accounting might provide some very interesting information.

3. HOW MUCH MONEY is REALLY in the SSLOCSD accounts? The Water Board had a devil of a time getting SSLOCSD/Wallace to submit the records/certified audits it needed to do the Water Board’s own audit, and Wallace/SSLOCSD Board, at the time of the hearing, STILL had not submitted all of the financial information the Water Board needed.

4. HOW MUCH MONEY in interest have we lost because the SSLOCSD funds were held in lower-interest-bearing short-term accounts? We have $$$MILLIONS in short-term accounts that we could have invested in longer-term, higher-interest-bearing accounts.

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Read below (between the three ***) to understand how Wallace/Ferara et al. screwed around with accounting terms to make it look like we didn’t have enough money to pay off a Water Board fine (or other large, impromptu expenditures).

For someone who pursues trivia in transcripts and other documents, the 9/7/2012 Water Board hearing was a gold mine.

***At the water board hearing about the John-Wallace December-2010 SSLOCSD environmental disaster, the Senior Economist for the Water Board, Gerald Horner, explained more than once the fact that the SSLOCSD ratepayers can pay the fine right now, that there would not need to be an increase in our SSLOCSD rates, and that we have been carrying in short-term accounts (assets that can be turned to cash within 90 days) funding which is way beyond what any other wastewater treatment plant of our size carries.
John Wallace and his hand-picked accountants had previously claimed (regarding the possible Water Board fines) that the SSLOCSD didn’t have liquid assets available to pay a Water Board fine without raising customer rates. Wallace and his accountants claimed this on their accounting statements, including the ones they submitted to the Water Board and Mr. Horner.
However, as Mr. Horner explained at the hearing, we (the SSLOCSD ratepayers) have accumulated $$$MILLIONS in short-term accounts that can be converted to cash in less than 90 days. In other words, we have (according to Wallace’s accounting submitted to the Water Board) PLENTY of money for the Water Board’s fine.
Mr. Horner explained several times in the hearing why Wallace’s attorneys were wrong when they claimed that the money in the short-term accounts had to be held for emergency or other expenses. Here’s an example. Wallace’s attorneys tried to claim that we needed huge amounts of money in short-term accounts for things like employee payroll, employee tax payments, etc.
Mr. Horner explained that employee-specific funds go into a special account, required by law, and that SSLOCSD, indeed, has employee-specific funds in an appropriate special account.
Wallace’s attorney also tried to claim that we needed $$$money extra in short-term accounts (which pay less interest than long-term accounts) in the event there was a big earthquake and we needed emergency funds. Mr. Horner explained that this idea is completely out of step with accepted practices because the federal government has money set aside to step in if there is a natural disaster or other catastrophe, and that the funds start coming in almost immediately.***

Below is part of the transcript from the 9/7/2012 Water Board, with Mr. Horner’s quotes. The person asking the questions is Julie Macedo (Prosecutor for the Water Board). Mr. Gerrald Horner (Senior Economist for the Water Board) is answering the questions.

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Transcript of Hearing, September 7, 2012

Public Hearing To Consider Administrative Civil
Liability Complaint No. R3-2012-0030
South San Luis Obispo County Sanitation District
Held Before the
Regional Water Quality Control Board,
Central Coast Region

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Julie Macedo, Esq. (Prosecutor for the Water Board
Office of Enforcement)—asking questions

Gerrald Horner (Senior Economist for the Water Board
Office of Enforcement)—answering questions

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——-Page 63…..——

Q. And I know you helped me and the rest
of the prosecution team in a number of ways, and
we’re going to cover a couple of topics. Let’s
start with the foundation of a number of exhibits.
You assisted the prosecution team with
Exhibits 18, 109 and 113. Those are exhibits that
concern the economic benefits that we believe was
received by the district in this matter. Do you
recall those exhibits?

A: Yes, I do.
Q. Okay. And are they true and correct
copies of what they purport to be?

A. Yes, they are.

Q. Okay. Ms. Thorme may have questions

——Page 64——–

about the economic benefit and how it was derived,
but I’m going to proceed directly to ability to
pay if you don’t mind.

A. That’s fine.

Q. Have you ordinarily conducted an
ability to pay analysis?

A. Yes. In every case we usually require
a method analysis benefit of noncompliance and
also an ability to pay analysis.
ability to pay analysis is usually
done by first requesting the comprehensive annual
financial report from the district that gives us a
set of financials, according to a prescription
that has been agreed to by the accountants that do
this type of work. That has been — was requested
and we did not receive the comprehensive annual
financial report from the district, so therefore
we did not conduct a formal ability to pay on the
initial June 27th submission in chief.

Q. Okay. But we did at the time that the
district submitted its materials receive audited
financial statements; isn’t that correct?

A. Yes, we did.

Q. So we were able to do an ability to pay
analysis at that time?

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Page 65

Q. What did it reveal?

A. The ability to pay of the district is
adequate to cover the proposed ACL without any
kind of impact on the ratepayer.

6 Q. And how did you come to that
conclusion?

A. The conclusion was derived from the
financial reports that were submitted for fiscal
years ending in June 30th, 2010, fiscal years
ending June 30th, 2009, and the fiscal report for
the fiscal year June 30th, 2008.
In those reports there is a substantial
amount of unencumbered cash and cash equivalents
held by the district that is free to be used with
contingency expenses for the district.

Q. When you say “substantial amount,” what
amount are we talking about?

A. For the years 19- — fiscal year ending
2010 it is $5,125,000. For the year ending in
2009 it’s $5.8 million, and for the fiscal years
ending of 2008 it was $6.9 million. This is
substantially more than what is typically retained
in this type of an account.

Q. Okay. So I want to make sure, I’m not

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Page 66

an economist, I want to make sure I understand you
correctly.

The most recent financial documents
submitted to us that ends with fiscal year 2010
indicates a $5 million surplus?

A. Surplus.

Q. Okay.

A. Yes.

Q. So that is not indicating that there is
bills to be paid, that’s not reflected on a budget
an outstanding income and assets, that’s a
$5 million surplus?

A. That is correct.

Q. Okay. Is that money unencumbered?

A. That is correct.

Q. Is that money liquid?

A. It is. Some of it is held, but it’s
not — in a perusal of the account, it is not held
nothing more than 90 days, so it’s liquid in
90 days.

Q. Okay. Now, in one of the documents we
talked a little bit about wastewater treatment
rates and, you know, so it’s your conclusion that
based on this $5 million surplus that the district
can pay the full penalty recommended by the

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Page 67

prosecution team without passing it on to the
ratepayers, but based on the wastewater treatment
rate what was your analysis of the rates, are they
fair based on a consideration of other wastewater
rates around the area?

A. The rates that are currently being paid
by the district is about $16 a month for a
residence. $16 a month is a lot less than what
the average rates that are paid in the State of
California. The average rates are about $26 a
month…..

I was present for the entirety of the hearing, all 16 hours. In a nut shell the state subpoenaed the Districts financial records, all of them that would show the status of their bank roll. Wallace’s legal council insisted they did not have the $5 million + the state says they have that were shown on subpoenaed and directed to be most recent and correct financial records. They claimed to now have only $3 mil and thus the states accounting was way off as far as paying any fines. The states economist asked repeatedly how and where do you get this $3 mil figure?? The Districts response was on the latest financial reports, the ones the District was ordered to have already supplied. The States economist then asked why did you not submit these when we asked for them. The Districts response…you didn’t ask for them.
I tell you if Wallace specializes in anything its deceit and working the system for every penny available. “Districts” have differing laws and regulations then cities do and that’s where Wallace has found his Carte Blanche to fund his existence. Here’s Websters definition of the term.
arte blanche (kärt bläsh, blänch, blnch)
n. pl. cartes blanches (kärt bläsh, kärts blänch, blnch)
Unrestricted power to act at one’s own discretion; unconditional authority

Great summary, doggin. I wasn’t there for the entire meeting, but I very much agree with you about Wallace’s evasive tactics.

It isn’t just Wallace who uses CSD law carte blance, and you are correct about the CSDs’ very-flexible use of the CSD system. OCSD and NCSD immediately come to mind, both of which have, for many years, been loyal supporters of Wallace.

Well, until the whole water board thing…. =)

And LOCSD still uses Wallace as an engineer?

One of the reasons I have pristinely avoided LO politics is because of the slimy people LO has attracted into power positions. Really, a person only has so much time in one day to keep track of their crap.

And I think they depend on that, as well–so much crap is done, it is difficult for the public to catch all of it.

I’m sure that we are all fascinated that you avoid Los Osos politics MaryMalone, but to give you an update as you are way behind the times, the people in “power positions,” namely the current LOCSD board, are still busy making right the mess left them by the Lisa board from 2006-07, there are no new messes to clean up.

The tax payer liability from the 2012 District legal defenses…..$336,084.
NOV’s go back several years with legal costs associated and the $1,300,000 million dollar fine has yet to be settled. Now there is legal costs to be paid resulting from a recently filed class action suit as well as employee lawsuits yet to be settled. What’s that definition of insanity again???
Seitz and Wallace say the District cant afford to pay the fine.
I say Its indisputably a matter of the public cant afford Wallace and Seitz anymore.